Inflation Trends Could Keep Fed on Hold Until June, This Economist Says

As the Federal Reserve (Fed) continues to grapple with persistent inflation, economists are weighing in on the central bank's next move. Some, like Bankrate senior economic analyst Mark Hamrick, believe that the Fed may keep interest rates unchanged until June, given the recent trends in inflation and the uncertainty surrounding the banking sector.

Inflation has been a significant concern for the Fed, with the consumer price index (CPI) reaching a peak of 9.1% in June 2022. However, recent data shows a slowdown in inflation, with the CPI increasing by 4.9% in April 2023, compared to the same period last year. Core inflation, which excludes volatile food and energy prices, also slowed to 5.5% in April, down from its recent peak of 6.6% in September 2022.

Despite the slowdown, inflation remains well above the Fed's 2% target. This has led some economists to warn that inflation may be stickier than markets are expecting. However, the Fed has hinted at a potential pause in rate hikes, with Chair Jerome Powell suggesting that officials don't necessarily view a string of slower inflation readings as a prerequisite for a pause.

The banking sector's recent turmoil may also factor into the Fed's decision-making process. The sudden failure of Silicon Valley Bank in mid-March, followed by the collapse of Signature Bank and First Republic Bank, has contributed to a tightening of lending standards for small and midsize businesses and real-estate owners. This could lead to a sharper slowdown in economic activity than the Fed had previously anticipated.

In light of these factors, Mark Hamrick believes that the Fed may keep interest rates unchanged at its June meeting. He notes that the Fed has already raised rates by 5 percentage points, which gives them the luxury of waiting to see if they have done enough to slow down the economy and inflation. Powell himself has acknowledged that policy is tight, and Fed officials have hinted at greater caution in moving rates up due to the lagged impact of stresses in the banking system.

In conclusion, the recent trends in inflation, along with the uncertainty surrounding the banking sector, could lead the Fed to keep interest rates unchanged until June. However, investors should remain vigilant, as the Fed's decision-making process is subject to change based on new data and evolving economic conditions.